How To Make Safe Investments

Wow!  This is a loaded subject.  First, an investment that was considered safe 10 years ago is often considered a disaster today.  Second, what is safe for some is considered very risky by others. 

Let's consider the mattress.  You can keep all your money in a mattress.  It is safe from bankruptcy; "big brother" can't get it and the ups and downs of the economy don't affect it.  What happens if you have a fire?  I guarantee your homeowner's insurance won't cover more than a small amount of that cash unless you are paying extra premiums.  Maybe you have a thief who just needs a new place to sleep and doesn't have any idea of the value of what he actually stole.  It doesn't matter.  Your investment is still gone.   

But what about inflation risk?  Most of us know that the cost of living - the value of basic goods and services - has increased fairly steadily over the years.  If you have your money in a mattress, you'll only take out exactly what you put in.  Your money doesn't multiply on it's own in that mattress.  So, over time, if the inflation rate is averaging 3-4% a year, your money is steadily decreasing in real purchasing power.  That doesn't sound very safe either! 

• Some places, such as banks that are insured by the FDIC, are often considered safe.  As a straight investment, they probably are about the safest.  The biggest risk here is inflation risk.  Most bank products - savings accounts, CD's, etc. - don't help you earn enough to cover even the inflation risk.   
• Products such as government backed securities are generally presumed to be "safe".  Your investment is backed by the full faith and credit of the United States.  While most people feel that's a safe investment, there are those who believe the United States is headed for failure.  They don't consider those investments particularly safe.   
• Triple A rated bonds of major companies, such as GM, used to be considered the gold standard of a conservative portfolio.  They were "safe".  Most of us have heard by now how "safe" some of those investments are!   

I'm not saying this to scare you.  I'm trying to make you think about how you really feel about risk and safety.  I also want you to stop thinking that this is a one time decision!  If you're 20, then your risk and safety goals should be far different than they would be at age 60.  Also, while the buy and hold theory of owning investments has certainly lost some of its luster, it is by no means dead.  But you should review your portfolio regularly.  You should check your investments to make sure that they are performing at the standards you expect.  Don't misunderstand me here.  We can't predict the future.  The economy has ups and downs.  But if you smooth out the earnings, and your company isn't reaching its goals and improving, you might want to re-evaluate your ownership.   

Lastly, I certainly don't want to forget real estate.  Some thought that it was a no-fail investment.  Unfortunately, it's not.  That doesn't necessarily make it a bad investment though.  It does grow slower over the long haul than some other investments.  But for most investors who are upside-down on their current house, given time, you will probably find yourself right-side-up again.   

The key here is to really evaluate what you personally consider risky and plan accordingly.  If you fear the risk of outliving your money, then you will need a different investment approach than someone who fears losing all that they already have.  Tailor your investment plan to your own particular needs.